Why are unions against pension tax changes?

2016-02-22 10:19

Over the past months, there has been a great deal of discussion on new pension tax laws and their impact on provident funds. So vehement were the objections from unions (especially Cosatu) that the implementation date has been changed from 1 March 2016 to 1 March 2018. Why are unions so against this act? Could it be that at least in part, it will make it more difficult for protracted strikes to occur, reducing the bargaining position of unions?

The new Tax Amendment Act and will have a particular impact on provident funds, allowing for their treatment to be more in line with pension funds. As a result, upon retirement, a member will only be allowed to take one third of their pension as a lump sum and will have to buy an annuity (a stream of income from retirement to ultimate death) with the rest; and upon resignation, an employee’s contributions to their fund will be subject to tax (where provident funds withdrawals were tax free before). The changes will not impact any historic contributions to provident funds and will only affect future contributions.

The clear motivation behind these changes is to create an environment where workers save more for retirement and are less of a burden on the state in their old age. This is a worldwide phenomenon and imperative. With people living longer and longer, governments want to ensure that their citizens are able to look after themselves.

The problem in SA is that we have high unemployment and that employees who lose their jobs are often not able to find new employment readily and tend to dip into their pension and provident savings to survive. Many retirees also tend to withdraw their entire benefits to look after their extended families, due to low employment levels. The net result of this is that these people, even though they spend many years being gainfully employed and contributing to pension and provident funds, do not have sufficient savings in their old age to survive. As a result, they become a burden on the state.

In most countries with developed pension systems, laws surrounding retirement and early withdrawal are very strict, with either no early access to pensions or a high pension tax. Workers are actively encouraged to preserve their pensions upon early withdrawal (to save them for retirement and not to use them for spending) and to annuitise (buy a monthly income stream from retirement date to ultimate death) upon retirement.

Unions (Cosatu) appear to be very concerned about preservation being actively encouraged in SA. In response to the new Tax Amendment Act, Cosatu claimed that the Act “had introduced the issue of preservation through the back door”. According to them, “preservation cannot and will not be implemented outside the Comprehensive Social Security & Retirement reform”. Why are Cosatu so against preservation?

The main argument presented by the federation is that we suffer from a “current environment of high and stubborn unemployment and poverty in our society without a clear social security system in place.”. They intimate that it is important that workers receive a “lump sum payment upon retrenchment, change of employment or retirement” to allow them to survive financially. However, they concede that “in the long-term the cash runs out, leaving the worker to lead the rest of their life in poverty.”.

Cosatu therefore appears to be very concerned about people who cease to be workers, join the ranks of the retired or unemployed and stop being members of their unions. Fair enough and very altruistic, but could there be another reason for their aversion to preservation that may not be so altruistic?

SA has been suffering from protracted strikes for many years and more often than not, unions are able to extract healthy benefit increases from employers. The longer the strikes last, the more concessions unions appear to be able to extract from employers. If striking workers were to become strike-weary early on in the process, there may be a distinct risk that fewer concessions would be obtained. In the current environment without preservation actively encouraged, striking workers can at least look forward to cashing in their pensions if their actions result in dismissals or retrenchments. This reduces the risk of continuing with a protracted strike. If workers were forced to preserve their pensions upon retrenchment or dismissal, they might be less inclined to continue with a protracted strike and may be more willing to settle early with employers.

Is it therefore possible that unions are against the introduction of preservation, at least in part, because it would weaken their bargaining position when it comes to industrial action? If this were the case, are unions acting in the best interest of their members? Although the cashing in of a pension helps a retrenched or dismissed worker to survive in the short-term, it leaves them vulnerable in the long term (as per Cosatu’s own admission). Would workers not be better off remaining employed, but settling for lower benefit increases?

In an environment where employment levels are higher, there is no doubt that preservation and annuitisation upon retirement are desirable as it would reduce the burden of the state to look after people in their old age. Our focus should therefore be to increase employment levels. The unions in SA have an important role to play in this regard. To increase employment across the board, it is important that labour relations in SA improve, settlements are reached early and protracted strikes are avoided. In addition, unions should come to the party to create a more conducive environment for employment to grow by demanding less stringent employment conditions and protection. Unions should support youth subsidies, internships, vocational training, special labour dispensations in selected industries/regions, etc. In the long-run unions can only benefit from increased employment levels in SA, even if it means having to compromise on workers’ rights in the short-term.

The current approach is not working and has not worked over the past 20 years. Unemployment in SA has become a national crisis and cannot be dealt with in the usual way. In a previous blog, I recommended the appointment of a Minister of Employment who will have ultimate responsibility for employment levels, will co-ordinate across different government departments, unions, private sector and NGOs and will have the power and tools to drive the process. As part of this, we need unions to stop simply protecting their own turf, but to think more broadly about what will ultimately be best for our country, including for their members.

What do you think of the new pension tax laws? Do you think we can implement it considering our low employment levels? Do you think unions are worried about their industrial action bargaining power? Do you think unions can do more to promote employment in SA? I would love to hear your feedback. Comments are welcome on my website.

In the mean time, keep your talking straight!

#Preservation #Pension #Unions

Marius Strydom is the CEO of MLAX Consulting

https://www.facebook.com/straighttalkingstrydom

https://twitter.com/Marius_Man

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